Search age:

Search in:

GST increase no solution for raising revenue

Peter Reith

"GST is more efficient than payroll tax and its abolition would remove a disincentive to employment and improve competitiveness by cutting costs." Photo: AFR

Forget about increasing the goods and services tax. The welfare lobby might like the thought but just about everybody else thinks it's a crazy idea.

I fought for the GST back in the early 1990s. Then, the tax was designed so that a big chunk of the revenue was allocated to abolish the very inefficient wholesale sales tax. When finally implemented in 2000, the abolition of the wholesale sales tax gave businesses a shot in the arm because although they collect the GST, the massive hidden costs imposed by the former tax were removed. It was a huge boon to the economy.

The successful fight for the GST became one of the single most pro-business reforms in the past 40 years. The tax was opposed by Labor.

Today’s advocates do not want a better tax system; they just want to raise more taxes. The states will not want to be seen pressing for the GST, especially as some will soon be facing elections.

Advertisement

Some say budget funding decisions for the states are a ploy to force them to advocate GST increases. I think that is just Opposition Leader Bill Shorten’s fantasy. The states just want more dollars from wherever they can find them. But people do not want to be handing out more cash to governments; they want governments to better manage their finances and to do more to cut waste.

Any discussion about the GST could be considered only if the additional revenue was used, not for more spending but for abolishing inefficient taxes such as payroll tax.

The GST brings in about $50 billion a year. Payroll tax gives the states about $20 billion annually. GST is more efficient than payroll tax and its abolition would remove a disincentive to employment and improve competitiveness by cutting costs. When, as shadow treasurer, I first put some GST proposals to then leader John Hewson, I suggested 10 per cent. In 1992, 15 per cent was proposed in Fightback!, which also proposed the abolition of payroll tax. This was not revived by the Howard government because the cost of abolishing payroll tax would be about 4 per cent of the GST. Howard thought a 15 per cent rate was more than the public would be prepared to accept. He was right then and that reform would still be hard to sell today.

Labor and its running partners, the Greens and the populist Clive Palmer, are also unlikely to agree to a change in the GST. Broadening the base on food might raise $6 billion to $7 billion, and of that about $2 billion might be given back in compensation. But most people would think the compensation is not enough, some will worry that it will not endure, and the Senate will never agree to tax food because it is regressive.

Some believe the GST is not sustainable but the tax's 58 per cent coverage of household consumption is similar to other advanced economies. Broadening other targets such as health, education or imputed rent would also be very difficult.

The bottom line is that there is no easy path to more revenue. Money for government is going to be tight for some years to come. The recent big shift in consumer behaviour has been the reduction of consumption and much bigger savings, and hence less GST revenues. Labor’s answer to this situation is to continue borrowing, but our debts are ballooning to unsustainable levels. The future is structural reform to encourage better economic performance that will boost income for families and eventually encourage more consumer spending. This can be done but it will be hard to achieve because Senate opportunists will block many of the reforms that are needed.

In the meantime, the premiers will not let up until they get more cash.

The government could at least pacify some by changing the distribution of the GST receipts. In the past, per capita funding was the formula for 10 years. Today, Western Australia (per capita relativities 37.6) and Victoria (88) are right to complain that they get a bad deal. The present system really suits only the two mendicant states, Tasmania (1.6) and South Australia (1.2): the four other states should be funded on a per capita basis. The two poorer states should then be funded by direct negotiation with the federal government. The benefit of this approach is that the bigger states are then in a position to make decisions based more on their needs rather than the needs of the two poorer states.

Politically, this would be a case of divide and rule, and a better policy neatly aligning with the outcome of getting the big states off the federal government’s back and limiting the whingers to Tasmania and South Australia.

Peter Reith is a former Howard government minister and a Fairfax columnist.

103 comments so far

'The tax was opposed by Labor' Peter seems to forget that the Liberals opposed the original GST proposed by Paul Keating

Commenter

John Holmes

Date and time

May 19, 2014, 3:02PM

@John, Peter just uses opportunities like this to slag off al Labor - who have said they oppose a rise in the GST. Why? Because like everything else in this budget, it would disproportionately affect those on lower incomes.After only 15 years in operation, those advocating a rise in the GST never acknowledge what a FAILURE this clumsy and lazy tax is. How long will it be till its not enough again? Here's a novel idea - how about we start talk about the billions to be gained from just closing tax loopholes & stop real middle class welfare like the $50,000 paid parental leave scheme, private school & private health insurance rebates, introducing even a small tax on superannuants over 65 (these super earnings are Tax free C/- P Costello, and Labors last attempt to bring in even a small 15% tax was opposed by Coalition). How much could be gained even in these small areas?The truth is, conservatives just want to punish the poor & look after their mates. Last night sweaty Joe studiously avoided acknowledging that in any scenario, not having any safety net all could be personally catastrophic for some.Like so many conservatives he seemed unable to grasp that the safety net is there for a reason - so people don't STARVE. 6 months is a long time to not be able to pay for food on the table, to pay rent, electricity, gas etc.No coalition member has yet answered the question - what happens in a worst case scenario of months of no job & no money?

Commenter

Caroline

Date and time

May 20, 2014, 6:57AM

.... And we ended up on a half baked GST. We didn't get the Tax cuts and pension rises.

Commenter

Kingstondude

Location

Melbourne

Date and time

May 20, 2014, 7:16AM

Peter also seems to ignore two ex Victorian premiers from opposite sides of politics both supporting GST changes and all current premiers considering it.The vast majority of leaders are becoming more accepting of changes.This being the case what is the premise of this article?

Commenter

Bernie

Date and time

May 20, 2014, 7:19AM

@John Holmes:Whether or not you support the GST, the facts are that it now an integral part of Australia's tax system. If revenue needs to be increased, and it does, the GST must be part of the solution. All the debate has centred on spending but the real debate should be about how we can afford our current standard of living into the future. Tax revenue comes from many taxation streams but principally Income tax, company tax and the GST. The action required is to get the calculator out and apply the necessary percentage increase to these three taxes and the problem is solved. Sure there would be outrage aplenty. but because of the volume of revenue involved the increases would be relatively minor and sustainable.

Commenter

JohnC

Location

Gosford NSW

Date and time

May 20, 2014, 7:37AM

So John ..it only shows that LNP politicians have selective memories. Please don't try and confuse them by speaking the truth. They have no idea what the word means.

Commenter

srg

Date and time

May 20, 2014, 7:54AM

A liberal senator now says slap GST on food, why? because they cant manage our economy so we cover up for that mismanagement by being forced to pay more taxes, and same time we over-populate adding fuel to these fires.

Commenter

Brian Woods

Location

Glenroy

Date and time

May 20, 2014, 10:53AM

The best solution is to have a debits tax. If we had a debits tax of say 3% on every bank transaction not only would it be progressive, but it would mean ALL other taxes can be removed. That is, no income taxes, payroll taxes, stamp duties, excise, GST etc etc. It would also mean that companies that currently avoid taxes will not be able to do so...

Commenter

n720ute

Location

North Coast NSW

Date and time

May 20, 2014, 10:59AM

Caroline, how is the GST clumsy and lazy? It is a smart tax, only being paid by the final consumer. The wholesale taxes it replaces often ended up being taxes on top of taxes., with no flow through claims by businesses possible.

It makes sense to have a broad taxation base and every developed country has a GST type tax so you can get taxation revenue from tourists, imports, etc.

Commenter

Nick

Location

Perth

Date and time

May 20, 2014, 11:21AM

We should start with a totally clean slate, pick a reasonable target figure for total taxation (eg. 5% of GDP), negotiate a reasonable split of total taxation to the federal government (eg. 40% of total) and ratio of the remainder going to each state (eg. x% of the total as a fixed amount (which allows for special needs - smaller state, disadvantaged etc) plus y% per population head).

Once the target total tax take (as a % of GDP) is decided, the best mix of taxes (based on efficiencies, fairness etc.) can be worked out. eg. some payroll tax, some property transfer taxes, some capital gains tax (with either the old, complicated 'real gains' based on indexing the cost base to cpi, or a reasonable fixed rate, possibly decreasing for longer holding periods as is used in the UK, or an annual threshold of gains that are tax free. May be worth looking at making home loan interest tax deductible but capital gains on the home taxed, as in the US), some income tax with reasonable thresholds and rates (eg. 0% rate up to 50% of the 'poverty line', 10% tax rate up to the poverty line, 25% up to average AWOTE, 35% up to triple AWOTE, and 50% on income above 3x AWOTE). And maybe a few other taxes and charges for behaviour modification reasons eg. carbon price set to the trade-weighted carbon price of our major trading partners, some medical services copayments to reduce unneeded visits to GP or emergency departments etc.

Total spending on welfare, education and health should be fixed as % of total tax revenue. And those that vary during the economic cycle (eg. unemployment benefits) should be set at a rate 9eg. 50% of AWOTE) that will match tax available 'over the cycle'.